Working Paper: NBER ID: w20831
Authors: Roger E.A. Farmer
Abstract: This paper constructs a simple model in which asset price fluctuations are caused by sunspots. Most existing sunspot models use local linear approximations: instead, I construct global sunspot equilibria. My agents are expected utility maximizers with logarithmic utility functions, there are no fundamental shocks and markets are sequentially complete. Despite the simplicity of these assumptions, I am able to go a considerable way towards explaining features of asset pricing data that have presented an obstacle to previous models that adopted similar assumptions. My model generates volatile persistent swings in asset prices, a substantial term premium for long bonds and bursts of conditional volatility in rates of return.
Keywords: sunspots; asset prices; monetary economy
JEL Codes: E3; E43; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sunspots (E32) | asset price fluctuations (G19) |
| sunspots (E32) | non-fundamental shocks (E32) |
| non-fundamental shocks (E32) | asset price fluctuations (G19) |
| sunspots (E32) | term premium for long bonds (E43) |
| sunspots (E32) | conditional volatility in rates of return (C58) |
| assumptions (agent types, perpetual youth, government debt) (D84) | asset pricing features (G12) |